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Welcome to Information, Inspiration and Guidance

In the world of business, we encounter everyday challenges. Our independent business advisers here in Smart Business help small businesses everyday. Yours could be the one they’ll help today.

How does one improve cash inflow vis-a-vis cash outflow? My partner and I have a construction business and there are times when cash is tight. What are the options available for us in dealing with this scenario?

When a small business find itself in a situation where it is unable to meet the week’s payroll, monthly utility bills, loan amortization and payables due a supplier, cash flow needs to be managed.

Cash flows and in flows will almost never occur at the same time. The lag time between cash in flow and out flow is known as cash flow gap.

Experiencing a cash flow gap occasionally does not necessarily mean your business is on the verge of collapse. Even the best-managed companies are at the mercy of seasonal fluctuations.

There are three tools for managing your out flows:

Trade Credit

Trade Discount

Negotiating payment terms with suppliers and vendors or deferring expenses; using the “float”

Trade Credit is what you get when your supplier allows you to defer cash payments for goods and services in exchange for your promise to pay them in the future. It is essentially an interest-free short-term loan.

Trade Discount is a percentage taken off the total amount of your supplier’s invoice if you pay within a specified period of time. This is typically 1 or 2 percent if you make payment within 10 days. It is obviously a contradiction to the basic rule of delaying cash out flows. In most cases, you are better off paying the bill early and taking advantage of the trade discount.

Negotiating payment terms presumes that some of your suppliers may be willing to extend credit terms on the basis of your past and present business relationship with them, your payment history and perceived credit worthiness and prospect of securing a larger order or your continued patronage.

Finally, you may try to use a somewhat risky way of handling a temporary cash shortage called the “float” – which is the difference between when your check is written and when it is cashed.